Working paper Local governments’ impact on enterprises’ market accessibility Understanding enterprises’ location choices in Hajipur, India Abhinav Alakshendra Ziming Li October 2018 When citing this paper, please use the title and the following reference number: C-89115-INB-1 Local Governments’ Impact on Enterprises’ Market accessibility: Understanding Enterprises’ Location Choices in Hajipur, India by Abhinav Alakshendra* & Ziming Li+ Abstract In the context of developing countries, this paper seeks to determine the extent to which the government impacts manufacturing enterprises’ market accessibility, specifically when infrastructure is insufficient. Our research derives from a questionnaire-based survey of 153 enterprises, located in the town of Hajipur, India. Based on a statistical analysis of responses to the open-ended questions collected from representatives of the surveyed enterprises, we find that considerations of the consumer market and profit directly drive the agglomeration of enterprises beyond (all) other (examined) factors. We examine the relationship between local government support and market accessibility by using two methods of analysis, OLS regression, and the average treatment effect. There are six indices of local government support which covers subsidies, joint subsidies for production or general support. Four indices for market accessibility are constructed by assigning 3-scale and 5-scale categorization schemes of the locations of final production in both ascending and descending orders. We also find that the government support helps enterprises reduce cost, and facilitates the enterprises’ final product to be sold in more distant markets. This research provides a new perspective towards the role government can play in fostering local prosperity in developing countries. Keywords: Infrastructure, Corruption, Average treatment effects *Assistant Professor, Department of Urban and Regional Planning, University of Florida +Ph.D. Candidate, Department of Urban and Regional Planning, University of Florida 1 I. Introduction Manufacturing agglomeration has proved to be a catalyst for regional economic growth in developing countries (Chakravorty, Koo, & Lall, 2005; Ghani, Kerr, & O’Connell, 2013; Mukim, 2011). However, not much has been written on the current manufacturing agglomeration in Bihar. Bihar is one of the poorest states in India and is categorized in the group of backward states. Bihar’s share in the national industrial performance is disappointing in terms of the number of factories (1.52%), investment (0.34% for fixed capital and 0.58% for working capital), the value of output (0.84%), and net value added (0.58%)1. However, the growth of industrial development in Bihar has been impressive in the last decade. According to the Annual Survey of Industries 2009-2010 and 2010-2011, from the Government of India Ministry of Statistics and Programme Implementation, the growth rate of industrial net value added in Bihar was 90.21%, which was far greater than the average national growth rate (19.32%).2 While being the 17th most populous municipality in the State of Bihar, Hajipur became one of the fastest growing cities of Bihar. The rise of Hajipur as an industrial destination is miraculous given the lack of sufficient provisioning of public goods and services, and the potential competition from neighboring agglomeration centers such as Patna and Muzaffarpur. The study attempts to investigate the rationale behind the location choice of the firms in Hajipur. It also attempts to measure the impact of government at all levels on market accessibility (i.e. the weighted distance between the enterprises and the final 1The data is for 2013-2014. Government of Bihar. Economic survey, 2016-2017, p. 128. Available at http://finance.bih.nic.in/Documents/Reports/Economic-Survey-2017-EN.pdf 2 In Table 4 Estimate of some important characteristics by State for the year 2009-2010 in Annual Survey of Industries 2009-2010, the industrial net value added is ₹ 232,130 Lakhs and ₹ 59,211,387 Lakhs for Bihar and India respectively. Table 3 presents Principal Characteristics by the Major States in Annual Survey of Industries 2010-2011, the industrial net value added for Bihar stands at ₹ 441,499 Lakhs, and for India is ₹ 70,457,581 Lakhs. Central Statistics Office (Industrial Statistics Wing) - Ministry of Statistics and PI, Government of India (2010- 2011). Annual Survey of Industries 2009-2010, Retrieved from http://www.ilo.org/surveydata/index.php/catalog/206 Central Statistics Office (Industrial Statistics Wing) - Ministry of Statistics and PI, Government of India (2010- 2011). Annual Survey of Industries 2010-2011. Retrieved from http://catalog.ihsn.org/index.php/catalog/3438 2 market of the goods produced) of the firms. While Hajipur has experienced rapid industrial growth, the low-efficiency and high corruption at the local level have been limiting its growth. The outline for the rest of the paper is as follows. In Section II, we discuss lack of basic amenities in Hajipur, which are essential for industries to thrive. In Section III, we probe the role of the government in the overall development of industries in Hajipur. In Section IV, we discuss the determinants of enterprises’ input-output and expansion decisions with the help of quantitative methods, such as bootstrapping and regression analysis. In addition to these methods, we use three types of propensity score matching to estimate the average treatment effect. We do this to understand the magnitude of influence played by the proximity of Patna to the Hajipur on latter’s industrial growth. Further, we also estimate the treatment effect of the treatment variables. Section V reports results i) a benchmark OLS model for estimating government support in general, ii) the average treatment model for estimating the impact of support from the Hajipur local administration and iii) the treatment effects models for assessing robustness. Section VI summarizes the findings and concludes. II. Background There are two industrial areas in Hajipur, the old industrial area (8.89 acres) and the export promotion industrial park (EPIP) (25.43 acres). Both these areas are under the administration of the Bihar Industrial Area Development Authority (BIADA). In recent years, some relatively big and noteworthy industries have come to the EPIP, however, the old industrial area has been losing industries at an alarming rate. Between 2006 and 2016, Bihar government implemented some of the most generous industrial incentive policies for industries, and Hajipur has been a major beneficiary. Availability and affordability of land attracted most of the industries in both industrial areas. Hajipur has a locational advantage as it connects Patna to the North Bihar. In terms of market accessibility, goods produced in Hajipur are sold in North as well as South Bihar. Patna, the largest market in Bihar, is across the river Ganga from Hajipur. Patna is a catalyst of growth for Hajipur due to the size of the market and proximity to Hajipur. Hajipur and Patna are connected by the Mahatma Gandhi Setu, a 3 6 kilometer long bridge. Although, transportation costs have reduced globally (Hummels, 2007), Hajipur has witnessed an increase in the transportation cost to Patna. The Gandhi Setu is in dilapidated condition since last 8-10 years. This is due to an over-reliance on the sole bridge that connects the North and South Bihar. The extreme population growth, urbanization and economic development of Hajipur have exponentially increased the usage and traffic on the bridge. With most products being transported via trucks, the bridge acts as a vital link to the economic vitality of the city. However, overcrowding and lack of alternative options have put pressure on the bridge to exceed capacity, leading to major structural failures (Roy, 2015). This has led to the permanent closure of lanes and restrictions on the freight weight which has made Patna market less accessible for the Hajipur industries. II (a). Data The survey mainly covered topics such as enterprises’ production, market conditions and linkages, and feedback on the impact of the (local) government and state industrial policies.3 The education background and role of respondents are shown in Table 1. The total sample size is 153 enterprises and it covers businesses throughout Hajipur. The questionnaire consists of 8 sections including 1) Identification of enterprises and respondents, 2) Enterprise details (i.e. production and market), 3) Worker details, 4) Enterprise practices (i.e. relationship with employees and other enterprises), 5) Input and output of enterprises, 6) OAE information4, 7) Changes and problems faced, and 8) Government role. Through Section 1) to Section 4), the questions are designed mainly in the format of standard selection. From Section 5) to Section 8), the questions are adopted in an open-ended format. Table 2 shows the number of enterprises by ownership and by employment. Most of the enterprises are operated perennially, with only 9 operating seasonally. Among these seasonal enterprises, two are owned account enterprises (OAE), (i.e. those which do not hire workers), four are Non-directory enterprises (NDE) (i.e. unit with less than 6 workers) and two are directory enterprises (DE) (i.e. unit with 6 or more employed with at least one of those being a hired worker employed on a regular basis). 3 This survey was supported by the International Growth Centre (IGC), Oxford. 4 Own Account Enterprise (those which do not hire